An Idea Reagan Must Abandon

WASHINGTON — Before he left on vacation, President Reagan vowed to ``pull out all the stops`` for tax reform in September. Let`s hope he stops and thinks about one phase of that fight before he plunges further into it.

The key issue--the make-or-break issue for tax simplification--is the deductibility of state and local taxes. It is the $33 billion gorilla, the most widely used of all deductions and the one whose abolition is most critical to balancing the books in the Reagan tax plan.

The meetings last week of the nation`s governors and state legislators reaffirmed their opposition to the repeal of deductibility. Many also showed a willingness to consider ways of compromising on the issue.

There must be compromise in order to have tax reform. Reagan is going to have to yield on one of his most cherished--and mindless--principles .

It is the belief that all taxes are bad, and anything that offers comfort to the tax collector has to be opposed. This false principle has led him to press repeal of state and local tax deductibility.

Deductibility eases the pain of the property taxes that finance local schools and police, the state sales and income taxes that pay for education, welfare and transportation programs. As John Shannon, executive director of the Advisory Commission on Intergovernmental Relations, has said,

deductibility is also the most effective device the federal government has found for reducing the fiscal disparities between rich and poor states, wealthy and poor communities.

Poor jurisdictions typically require larger tax efforts from their citizens; their needs are greater, their resources less. Those fiscal disparities, more than any other factor, explain the differences in the tax burdens of differing states and cities.

But Reagan has taken the opportunity to depict the ``high-tax`` states and cities as the playpens of liberals and big spenders. Deductibility, he says, is bad, because it provides a subsidy from the low-tax states to the high-tax states.

That argument just doesn`t wash. The grossest disparities in tax burdens are between the resource-rich states like Alaska and the poverty-crippled states like Mississippi. States that finance high levels of public services

--like California and New York--do have high taxes, but they also have masses of low-income, immigrant populations whose needs the nation expects them to meet.

Repeal of deductibility would significantly worsen the competitive position of those states. It would increase the incentives for wealthy individuals and businesses to relocate from high-tax to low-tax jurisdictions. Most of the governors, legislators, mayors and county officials are saying that such a policy levies too high a price for tax reform. On principle, state and local officials are right to resist the Reagan proposal to repeal deductibility. As a practical matter, they probably exert enough influence to block passage of any program that involves complete repeal.

But they would be wise not to press the issue to the point of confrontation. As Shannon told the legislators at their meeting in Seattle, they have to be aware of the consequences of letting the income tax system remain unrepaired, even while growing numbers of Americans say they think it operates unfairly. Both as citizens and as public officials, they have a stake in preserving the credibility of the nation`s most important revenue system.

Any number of available devices will preserve the principle of deductibility but achieve some of the revenue gains needed to balance the books on tax reform. By allowing deductions only for the amount of state and local taxes exceeding 1 percent of adjusted gross income, as Sen. Dave Durenberger (R., Minn.) has suggested, one can strike the bargain that is needed to produce both revenues and votes--without violation of fundamental principles.

But there can be no effective compromise until Reagan signals that he is ready to abandon his foolish principle that virtue in government consists solely of reducing taxes.